A company must decide between scrapping or reworking units that do not pass inspection. The company has 44,000 defective units that have already cost $264,000 to manufacture. The units can be sold as scrap for $156,000 or reworked for $198,000 and then sold for $374,000. If the company decides to rework the units, incremental income equals
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The incremental income from reworking the units can be calculated by subtracting the cost of reworking and the original manufacturing cost from the sales price after reworking.
So, the incremental income would be $374,000 (sales price after reworking) - $198,000 (cost of reworking) - $264,000 (original manufacturing cost) = -$88,000.
However, if the company decides to scrap the units, they would get $156,000. So, the incremental income from reworking compared to scrapping would be -$88,000 - $156,000 = -$244,000.
Therefore, if the company decides to rework the units, the incremental income would be -$244,000. This means the company would lose $244,000 compared to if they decided to scrap the units.
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